FX: Brexit imperils City’s status as euro-clearing hub

The European Central Bank (ECB) is likely to quickly challenge London’s status as the eurozone’s largest hub for the clearing of euro-denominated trades if the EU referendum goes against UK membership – but the move, which would be seen as highly political, would be beset with legal challenges.

The implications of the ECB forcing the clearing of
euro-denominated trades through the European single-currency
area for the UK are clear: it’s an existential
threat to the City’s status as the pre-eminent hub
for the euro wholesale market, given the euro’s
position as the second most-traded currency after the
dollar.

Gregor Irwin,
Global Counsel

The ECB believes clearing and settlement is a critical piece
of market infrastructure that it should oversee for financial
stability purposes, explains Gregor Irwin, chief economist
at Global Counsel.

"If that happens, the risk is that trading would follow
clearing and settlement, weakening one of the pillars of
London's position as Europe's leading financial centre," he
says.

Raoul Ruparel, co-director of policy think-tank Open Europe,
says neither the ECB nor the Banque de France have
given up on the idea of forcing the clearing of
euro-denominated trades through the eurozone since a European
Court of Justice (ECJ) ruling in March 2015, which found in
favour of the UK as a hub for euro clearing against ECB
objections.

"Given that the ECJ ruling said this was beyond the purview
of the ECB, it is not entirely clear whether the ECB could take
immediate action to move this activity from
the UK even in the event of Brexit," he explains. "A change
to the statute of the ECB might have to be sought."

There is also uncertainty around what would happen to the
passporting rights of clearing houses in any post-exit
scenario, continues Ruparel, adding: "If passporting was not
maintained, clearing of euro-denominated trades through the
eurozone could happen anyway."

Raoul Ruparel,
Open Europe

However, Ruparel also observes that
the Bank of England could argue that the swap lines put in
place to counter the ECB’s expressed concerns over
the lack of direct access to ECB liquidity would continue to
function even if the UK left the European Union.

In this case, any decision to move clearing from the UK
would clearly be motivated by politics rather than
economics.

"The ECB statute could be changed by QMV [qualified majority
voting – a system of weighted votes] rather than
unanimity, which means the UK could not simply veto any change
even if it remains in the EU," he adds.

"However, since this issue has been driven by France in
particular and Spain, it is far from clear that there would be
sufficient support from other EU members, and the UK would also
have recourse to the ECJ if it was still a member of the
EU."

Christian Odendahl,
CER

Christian Odendahl, the Centre for European
Reform’s (CER) chief economist, agrees it is a
political question whether the eurozone would be willing to use
its qualified majority in the EU to immediately change the ECB
statutes after a Brexit vote but before Britain has fully left
the EU.

"It would certainly be a relatively aggressive step during
what will be a long and difficult divorce negotiation," he
says. "I consider it unlikely that such a decision would be
taken before Britain had formally left the EU."

Simon Gleeson, a partner at Clifford Chance specializing in
international banking services and financial regulation,
observes that the whole point of the single market legislation
is to prevent countries and organizations (including EU
organizations such as the ECB) interfering with the freedom of
EU firms to do business in their jurisdictions.

"The development of London as the EU financial centre has
been largely based on those rules which would, of course,
abruptly vanish on the day that the UK left the EU," he
says.

Simon Gleeson,
Clifford Chance

"However, the fact that the EU would be able to take back
what it regards as 'its’ financial centre does not
mean that EU institutions would immediately launch a full-on
regulatory and legal assault on cross-border business done from
London with EU clients and investors."

According to Massimiliano Danusso, managing partner of
BonelliErede’s London office, recent comments by
the German finance minister Wolfgang Schäuble appear to
support the view that the EU will react to Brexit by making the
leave process difficult for the UK.

The ruling of the ECJ in March 2015 was based on the
supposed lack of competence of the ECB to rule on the activity
of securities clearing systems, adds Danusso.

"In case of Brexit, the position taken by the ECJ would not,
therefore, be directly affected," he says.

"However, the ECJ itself suggested a possible solution to
this issue, by highlighting that the ECB could request the EU
legislature to amend the existing regulations by the addition
of an explicit reference to securities clearing systems."

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